I wrote an article on US Energy at the beginning of the summer, where I pointed out strength in the US prices of natural gas, oil and NGLs (natural gas liquids), and laid out a bull case for investing in US energy companies. The case for every single argument I made has gone parabolic in the past few weeks.

Below, please see a couple of examples of where commodities were in my July article versus where they are now. I lay out the 12-month strip prices, which are far more important to producers from hedging perspectives than current spot prices. WTI is slightly higher than July while Natural Gas is MUCH HIGHER.

12-Month Henry Hub Natural Gas Strip for Previous 5 years in July

12-Month Henry Hub Natural Gas Strip for Previous 5 years Now

12-Month WTI Strip for Previous 5 Years in July

12-Month WTI Strip for Previous 5 Years Now Source Bloomberg

Propane, which doesn't have a traded strip, is seeing spot prices approach decade highs BEFORE the winter, which is typically when propane sees its highest demand.

As strong as this pricing environment is in the US, it pales in comparison to Europe and Japan/Korea, which are seeing downright scary price spikes.

Netherlands Title Transfer Facility Natural Gas Physical Forward Prices

Japan/Korea LNG futures contract prices

These high prices are causing problems already. Several European manufacturers have had to shut down either from lack of available energy or from operating costs being too high.

As I argued in my July article, I think there are several causes for these energy prices. First and foremost in my mind is lack of investment in new production. This missing investment is partly due to some regulatory challenges faced by exploration companies and pipeline operators, and partly due to changing demands by investors, who, after suffering from years of bad returns, have forced management teams to deleverage and focus on returning cash to shareholders rather than digging holes in the ground and laying new pipe. There has also been a focus on renewables such as wind and solar power, which have their benefits, but are showing their limitations, particularly in Europe, which has seen what happens from a few days of low wind speeds.

While trust is tenuous for many energy management teams to maintain this discipline, rig counts remain far below recent years despite pretty strong commodity prices all year.

Baker Hughes Oil and Gas Rig Count

Many exploration and production companies have not also shown discipline with capital spending, but with hedging. EQT hedged a large chunk of 2021 and 2022 by the time they reported Q2 earnings. They were penalized for it, which I argued was silly in August and still think is wrong. These companies hedge great baseline cash flows. Meanwhile, whatever they leave unhedged is a cherry on top for cash flows.

I have written favorably about EQT, Enterprise Products, Crestwood, and Crestwood Preferred. I love the management teams and the assets at (EQT), (EPD), and (CEQP). I have not written about Comstock Resources (CRK), but they have a ton of upside exposure to natural gas. I was neutral about Energy Transfer (ET). I like some of the assets there and there are signs of focus on deleveraging and cash flow generation, but I still don't trust management to continue that discipline.

If you want broader exposure to the energy industry, you can always just buy ETFs such as (XOP), (XLE), and (AMLP) although XLE is 22% Exxon (XOM) and 20% Chevron (CVX) so you could just buy those two stocks. For those who just want the commodities, there's (UNG) for natural gas and (USO) for oil, although I'm not a huge fan of those ETFs. I also have to caution that one has to be cognizant that all of these ETFs have run quite a bit.

I also think that these energy prices will combine with other inflationary pressures and cause some themselves. I also wrote a piece about inflation in the summer and follow up one this month, where I laid out companies that have the pricing power to offset these costs.

Energy has been a massive underperformer for years and remains underweight in many portfolios. While many energy commodity prices have skyrocketed of late, many underlying equities have had fairly muted responses and continue to trade below where they were pre-Covid. Naturally, these commodity prices could reverse, particularly if there is a warmer than normal winter. If you ask me, I think many energy equities are not pricing in continued strength. If, however, there is a colder than normal winter, given current prices and low inventories, we could see much more serious price spikes that will not adjust back to levels to which people have become accustomed any time soon.

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Disclosure: I/we have a beneficial long position in the shares of EPD, CEQP, CEQP.PR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.